The gain and pain from the dollar

To hear the media echo chamber tell it, the United States is “broke.” The markets see it differently, as investors are fleeing into Treasury bonds, which have the lowest yields in 60 years, and into dollars. This is good and bad news. It means that America remains the world’s safe haven in hard times, with the ability to borrow massive sums (say, for a real, job-creating stimulus) at very low interest rates. A strong dollar allows us to continue to borrow in our own currency — the world’s reserve currency — and for Americans to retain relatively strong purchasing power.

The downside is that the strengthening dollar makes U.S. exports less competitive by making them more expensive. This also hurts employment. It also lays bare the strategy of emerging nations, especially China, that keep their currencies artificially low in order to boost their exports.

Now, however, as the world hovers on the brink of another recession, central banks are having to intervene to prop up their currencies. The alternative: See their own purchasing power and value of assets priced in their currencies circle the drain as investors and companies flee developing economies for the safety of the dollar.